The 1987 Effect

For years after the crash of 1987 every time the market had a few rocky days and a bad Friday everybody became scared of another Black Monday. In almost every instance this turned out to be an excellent buying opportunity.

I believe that yesterday we witnessed a similar dynamic. After investors watched Freddie, Fannie, Bear and Lehman go to zero or thereabouts they now fear the Lehman Brothers effect. A renowned oil expert said matter of factly that BP is going to zero in the next few months because there is a second larger leak that BP is covering up. He offered little in the way of evidence of a second leak yet investors were quick to conclude that we had another Lehman Brothers on our hands.

Investors bought a combined 30,000 puts at the 22.5 and 20 strikes of BP expiring next week. A trader quoted in the Wall Street Journal called them lottery tickets. These puts are trading for 79 and 53 cents respectively. That is quite a price to pay for lottery tickets that have a week of life in them and are only likely to pay if a bankruptcy becomes evident by then. It seems like a mugs game to me but investors are always fighting the last battle. I suspect we will be seeing a lot more Lehman lotteries in the coming years.

1 comment:

Anonymous said...

gs and aapl are both not gaining from this rally. When the market rose early yesterday they didn't either. Yesterday the nasdaq made a lower low.